Judge OKs Chicago 'cloud tax' on Netflix, other streaming services; plaintiffs vow appeal over far-reaching implications

By Scott Holland | May 24, 2018

Saying he believes Illinois law gives the city of Chicago the power to slap a 9 percent tax on people who pay to use Netflix, Spotify, Xbox Live and other streaming services, a Cook County judge has said plaintiffs need to pull the plug on a challenge to Chicago’s so-called “cloud tax.” Plaintiffs, however, said they intend to appeal, because the decision has more far-reaching implications for the ability of revenue-hungry Illinois governments to impose similar taxes throughout the state.

Saying he believes Illinois law gives the city of Chicago the power to slap a 9 percent tax on people who pay to use Netflix, Spotify, Xbox Live and other streaming services, a Cook County judge has said plaintiffs need to pull the plug on a challenge to Chicago’s so-called “cloud tax.”

Plaintiffs, however, said they intend to appeal, because the decision has more far-reaching implications for the ability of revenue-hungry Illinois governments to impose similar taxes throughout the state.

In an opinion issued May 24, Cook County Circuit Court Judge Carl Anthony Walker granted summary judgment to the city and denied it to a plaintiff class attempting to challenge extension of the city’s 9 percent amusement tax to also include online streaming services.

Plaintiffs, represented by the Chicago-based Liberty Justice Center, raised four issues in their complaint. They asserted taxing streaming services in such a manner violates the federal Internet Tax Freedom Act, the U.S. Commerce Clause and the uniformity clause of the Illinois Constitution, while also exceeding the city’s taxing power.


Jeffrey Schwab   Liberty Justice Center

The city expanded the amusement tax to cover streaming services, effective June 9, 2015, by requiring Internet service providers to collect the tax and remit proceeds to the city. The plaintiffs filed their first amended complaint challenging the tax on Dec. 17, 2015. After the court agreed to dismiss three of six counts, the plaintiffs filed a second amended complaint, which gave rise to cross motions for summary judgment.

Walker rejected the plaintiffs’ arguments about the way the city taxes other forms of amusement, such as coin-operated machines or live performances. Live performances, he wrote, are “not sufficiently similar to performances or movies delivered through online streaming services,” and taxing machines 9 percent per use versus $150 per year would be “administratively inconvenient for the businesses, customers and the city.” This reasoning supported the city’s position on both the Internet Tax Freedom Act, as well as the state uniformity clause, the judge said.

While Judge Walker rejected the city’s arguments the plaintiffs lack standing to bring a Commerce Clause complaint, he agreed the tax passes the four requirements to Commerce Clause compliance: It applies to residents of the jurisdiction; is based on a customer’s billing address, which meets fair apportionment obligations; does not discriminate against interstate commerce; and “is fairly related to the presence and activities of the taxpayer within the jurisdiction.”

The judge also shut off plaintiffs’ arguments the city had exceeded its home rule authority. While some residents stream movies and music while outside the city, Walker agreed with the city’s contention that “streaming services are used by Chicago residents either exclusively or primarily within Chicago.”

In his decision, Judge Walker relied on the state’s Mobile Sourcing Act, which defines primary use as the chief residential or business address of the customer within a licensed service provider’s home area. The Chicago tax is billed to service providers, Walker pointed out, writing “the city has express authority to apply the Mobile Sourcing Act to streaming services provided by telecommunication companies.”

Jeffrey Schwab, senior attorney at the Liberty Justice Center, said plaintiffs intend to appeal.

“Cloud-based entertainment isn’t unique to Chicago, and people take this entertainment in and out of city limits all the time,” Schwab said. “Therein lies one of the biggest problems with this tax: The city is taxing activity outside its borders because the tax applies regardless of whether a customer actually uses a service in Chicago.

“If today’s decision is allowed to stand, then local governments across Illinois could tax activity that occurs outside their borders,” Schwab continued. “We will continue to fight for taxpayers against the city’s expansion of its taxing power.”

Judge Walker has recently been appointed to the Illinois First District Appellate Court, replacing Justice P. Scott Neville, who was appointed to the Illinois Supreme Court to replace retiring Justice Charles Freeman. 

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